An Orwellian Scheme Turns Into a Boomerang

by  Anton Keller, Secretary, Good Offices Group of European Lawmakers
cp 2580  -  1211 Geneva 2  -  Switzerland  -  t+f: +4122-7400362  - swissbit@solami.com

Contrary to current OECD tax data exchange initiatives, its 1988 administrative assistance treaty relies on full reciprocity. This could be fatal to such controversal schemes as the IRS' Qualified Intermediary Regulations.

1    On 13 February 1991 The United States has ratified the 1988 Council of Europe/OECD Convention on Mutual Administrative Assistance in Tax Matters (Interfipol Convention) which, for the US too, has come into force on 1 April 1995 (1).  The Netherlands, acting also for the Netherlands Antilles and Aruba, has become a party to this treaty on 1 February 1997, while for Norway and Poland it became binding on 1 April 1995 and 1 October 1997, respectively.

2    According to article 1 of the Interfipol Convention,

  1. The Parties shall, subject to the provisions of Chapter IV, provide administrative assistance to each other in tax matters. Such assistance may involve, where appropriate, measures taken by judicial bodies.
  2. Such administrative assistance shall comprise:
    1. exchange of information, including simultaneous tax examinations and participation in tax examinations abroad;
    2. assistance in recovery, including measures of conservancy; and
    3. service of documents.
    A Party shall provide administrative assistance whether the person affected is a resident or national of a Party or of any other State.
3    The United States made substantial reservations upon the deposition of its instrument of ratification on 13 February 1991.  Thus, while
"For the United States, this Convention shall apply to taxes imposed under Title 26 of the United States Code (the Internal Revenue Code of 1986), as amended, which correspond to the taxes in the categories referred to in paragraph 1.A and 1.B II and III of Article 2 of the Convention." (Annex A),
"The United States will not provide any form of assistance in relation to the taxes of other parties described in subparagraphs b.i or b.iv of paragraph 1 of Article 2 of the Convention (taxes imposed by or on behalf of possessions, political subdivisions, or local authorities)(as permitted by paragraph 1.a of Article 30 of the Convention)."
and, most importantly,
"The United States will not provide assistance in the recovery of any tax claim, or in the recovery of an administrative fine, for any tax, pursuant to Articles 11 through 16 of the Convention (as permitted by paragraph 1.b of Article 30 of the Convention)."
4    For the United States, the Interfipol Convention thus unreservedly applies (article 2):
  1. "to the following taxes:
    1. taxes on income or profits;
    2. taxes on capital gains which are imposed separately from the tax on income or profits;
    3. taxes on net wealth;
    imposed on behalf of a Party; and
  2. to the following taxes:
    1. ...
    2. compulsory social security contributions payable to general government or to social security institutions established under public law;
    3. taxes in other categories, except customs duties, imposed on behalf of a Party, namely:
      1. estate, inheritance or gift taxes;
      2. taxes on immovable property;
      3. general consumption taxes, such as value-added or sales taxes;
      4. specific taxes on goods and services such as excise taxes;
      5. taxes on the use or ownership of motor vehicles;
      6. taxes on the use or ownership of movable property other than motor vehicles;
      7. any other taxes." but not to
    1. "taxes on income, profits, capital gains or net wealth which are imposed on behalf of political divisions or local authorities of a Party;
    2. ...
    3. ...
    4. taxes in categories referred to in sub-paragraph iii above which are imposed on behalf of political subdivisions or local authorities of a Party."
5    Article 30, §1 specifies indeed:
"1.Any State may, at the time of signature or when depositing its instrument of ratific- ation, acceptance or approval or at any later date declare that it reserves the right:
        a.not to provide any form of assistance in relation to the taxes of other Parties in any if the categories listed in sub-paragraph b of paragraph 1 of Article 2, provided that it has not included any domestic tax in that category under Annex A of the Convention;
        b.not to provide assistance in the recovery of any tax claim, or in the recovery of an administrative fine, for all taxes or only for taxes in one or more of the categories listed in paragraph 1 of Article 2; ..."
6    Yet, reflecting the customary principles of equal sovereignty and full reciprocity, §5 of the same reservations article 30 specifies unambiguously:
"A Party which has made a reservation in respect of a provision of this Convention may not require the application of that provision by any other Party; it may, however, if its reservation is partial, require the application of that provision insofar as it has itself accepted it."
7    The US Internal Revenue Service had worked out with foreign banks and, on 31 December 2000, provisionally put into effect the controversial Qualified Intermediary Regulations 1441 (QI regs) (2). Despite the some 2600 US and foreign banks (3) which reportedly have applied for QI status, awareness on and opposition to these regulations (4) is rapidly growing in the financial service industry and lawmaker circles, both in- and outside of the United States.  This has been on account of their questionable effects on the US economy (5), their cost, human rights and sovereignty implications (6) and their unparalleled complexity.  And not least because of their development  (a) in apparent violation of at least one bilateral treaty with a foreign country, (b) through usurpation of the US Congress' constitutional tax-writing and treaty-making powers(7),  and  (c) in disregard of administrative procedures applicable for regulations effectuating costs to the private sector in excess of $100 mio.

8    Regardless of the above detailed undertakings the United States has entered into under the Interfipol Convention - specifically its explicit refusal to "provide assistance in the recovery of any [foreign] tax claim" - QI regs require the IRS' mostly involontary contractual partners at home and abroad to provide assistance in the recovery of US tax claims against US persons.  This includes, in the event, the IRS' novel and confiscatory 31% withholding tax (on capital, not on interest).  It is to be carried out with US law explicitly taking precedent over any and all eventually contrary foreign law provisions, with the IRS being able to unilaterally change the groundrules.  And economic key factors of foreign countries are thus to be invaded and made subservient to the whims of IRS officials and their deputies without US lawmakers having ever been consulted on whether this latest form of lex americana universalis is really helping and not hurting US national interests.

9    In the event of inadequate representations by their own governments and professional associations, financial institutions operating in jurisdictions covered by the Interfipol Convention - e.g. in the Netherlands, the Netherlands Antilles, Aruba, Norway and Poland - are thus seen to be in a particularly favorable situation for effectively opposing, e.g. by way of corresponding court actions, IRS requests to provide administrative assistance in tax matters without due full reciprocity.
 

NOTES

(1)    http://conventions.coe.int/Treaty/en/Treaties/Html/127.htm, and at http://www.solami.com/127.htm (Convention text), http://www.solami.com/127-1.htm (annexes), http://www.solami.com/127exprep.htm (Explanatory Report), http://www.solami.com/127sign.htm (signatories), http://www.solami.com/127res.htm (reservations).  The Convention was first publicly presented on the editorial pages of the Wall Street Journal Europe under the titles: "Off Base at the OECD" and "European Taxmen Plot an Orwellian Scheme" (9 May 1986), and "Waking Up to the OECD" (7 July 1986), on the web at: http://www.solami.com/ORWELL.htm.

(2)    "Application Procedure for Qualified Intermediary Status Under Section 1441 - Final Qualified Intermediary Withholding Agreement", Rev. Proc 2000-12, US Internal Revenue Service (http://www.solami.com/rp-00-12.pdf)

(3)    Myrna Zelaya-Quesada, "IRS to Propose Audit Guidelines For QIs in September, Staples Says", Daily Report for Executives, Bureau of National Affairs, Washington 17 August 2001 (http://www.solami.com/QI1441.txt)

(4)    Stephen J. Entin, "Treasury's Qualified Intermediary Regulations and the OECD Tax Haven Initiative: Threats to International Capital Mobility and Investment", IRET Congressional Advisory, #116, 28 June 2001 (ftp://ftp.iret.org/pub/ADVS-116.PDF); see also: http://www.solami.com/IRSaccess.htm, and "Dear Y2K rescapee and IRS Deputy" (http://www.solami.com/QInews.htm)

(5)    Richard W. Rahn, "ECONOMIC GROWTH OPTIONS", Washington Times, 9 August 2001 (http://www.solami.com/RR9Aug.htm)

(6)    Talking Points: "The IRS Money Laundering Machine: QI Regulations - More Government & Protection for Mafia, Less Legitimate Investments & Privacy", Washington November 2000 (http://www.solami.com/comments3.htm)

(7)    Gilbert Morris, "Signs and Sovereignty: The Growth of Supervenient Authority in the United Nations", contribution to meeting of the Competitive Enterprise Institute, Washington September 2001 (http://www.solami.com/MorrisUN.htm);  Bruce Zagaris, "Exchange of Tax Information Policies at the Millennium: Balancing Enforcement with Due Process and International Human Rights",International Platform Association, Washington 9 August 2001 (http://www.solami.com/Zagaris.htm).
 

Geneva, 3 September 2001